80. What it says is that the Auditor is relying
totally on the appointed actuary for those statutory returns.
Is that correct?
(Mr Sclater) I think that is correct.

Chairman

81. You were the Actuary?
(Mr Headdon) I was the Actuary from August 1997 onwards.
It relies on the Actuary for the valuation of the liabilities,
but that is in accordance with the requirements of the insurance
regulations. I do think it is important on this point to remember
that the purpose of the statutory regulations is to ensure, on
a very cautious and prudent set of assumptions, that life offices
have got sums available to meet their guaranteed benefits. It
is not about bonus distribution and final bonuses.

Chairman: I have not asked you about
bonus distribution. I fully accept that was not a matter for the
regulator.

Mr Beard

82. Dealing with the situation, as you said,
Mr Sclater, if you strike a compromise between the two groups
of policyholders, there is an outcome, but if you cannot strike
that compromise between the two groups of policyholders, what
sort of liabilities could we be looking at?
(Mr Sclater) I think that is very difficult to predict.
It will depend very much on what happens to interest rates and
it will depend on the behaviour of policyholders who have the
opportunity to go on adding to their policies, if they so wish.

83. Could it be more than £1.5 billion?
(Mr Sclater) Again I would like to defer to the actuaries,
but I believe the answer to that question is probably yes.
(Mr Headdon) It could be more or less, depending on
future circumstances.

Chairman

84. These liabilities are not all coming up
straight away, are they?
(Mr Headdon) No, they are spread out over the next
15 or 20 years as people retire.

Mr Cousins

85. When did you first make reinsurance provision
against these liabilities?
(Mr Headdon) At the end of 1998.

86. Again, it is the regulator's intervention
in 1998 which clearly triggers the reinsurance provision. It was
not something you did for yourself of yourself; it was the result
of regulatory intervention?
(Mr Headdon) As I said earlier, at the time we were
experiencing a very low take-up of these options and our reserving
approach previously reflected that. The regulator introduced guidance
assuming a very high rate of take-up in fairly adverse economic
circumstances. We secured a reassurance deal which would provide
some protection in the sort of adverse circumstances envisaged
by the regulatory regime.

87. What was the size of the reinsurance provision
in 1998?
(Mr Headdon) The effect on our statutory returns is
that it reduced reserves by about £800 million.

88. What did your statutory returns at that
point show as being a possible claim on reserves?
(Mr Headdon) It showed, on the assumptions that we
were required to make, that the guaranteed benefits would have
an additional value of about £1.5 billion.

90. On the point of the deception of the policy-holders,
so far this morning you have blamed the Law Lords; you have blamed
the Press; now you seem to be blaming the policyholders for not
getting hold of these statutory returns. Was it not simply misleading
to tell the policyholders that the liability was £50 million
at exactly the same time as you were telling the regulator that
the potential liability was £1.5 billion?
(Mr Headdon) The regulators make all sorts of adverse
assumptions on economic conditions. That leads, as I said, to
various levels of protection designed to ensure that life offices
will be able to meet their guaranteed liabilities in all but the
most adverse circumstances. It is not something that affects the
distribution of bonuses between different groups of policyholders.

91. In retrospect, Mr Sclater, do you not feel
it was wrong to conceal that potential liability from policyholders
in the annual accounts that they were sent?
(Mr Sclater) There was no attempt to conceal anything.
As I said earlier, we took extensive legal advice. We consulted
our auditors at very great length and debated the matter carefully
amongst ourselves, and we sought to put out a set of accounts
which gave, to the best of our ability, a true and fair view of
the position of the Society as it most probably was at that time.

Mr Beard

92. On this point, it indicates that you had
yourselves contemplated this £1.5 billion as being the liability
that at least you had to put in according to the regulator's assumption,
apart from all the issues I quoted earlier. Yet, on 1 February,
a passage from your letter to policyholders states that, contrary
to many of the reports that have appeared in the press, there
will be no significant cost imposed on the Society if the Court
of Appeal decision were upheld in the House of Lords. The speculation
regarding financial difficulties and costs (incurred) by with-profits
policyholders is therefore unfounded. Your Society remains and
will continue to remain financially secure. Despite all this background,
does that not almost amount to deception?
(Mr Headdon) I think this comes back to the ring-fencing
point I made earlier, that, although in the Court of Appeal the
two judges had found against us, a legal difficulty with a differential
final bonus between the two different benefits under the policy,
they made it very clear that the Board retained its ability to
set bonuses for the class as a whole at a level which would not
seriously impact on other policyholders.

Mr Davey

93. Were the full terms of this reinsurance
policy that the regulator effectively forced you to take out declared
in the statutory return?
(Mr Headdon) We made all the disclosures that we were
required to make under the regulations and the regulator was kept
fully aware of the provisions.

94. But in the return does it say that if there
was a court ruling which challenged successfully your position
with respect to bonuses and the way you were conducting your business,
the reinsurance policy would not have covered you? Did you say
that in your statutory returns?
(Mr Headdon) The reinsurance was against the economic
exposure of the Society in the circumstances envisaged by the
statutory returns. It was not and never purported to be an insurance
against a change of legal ruling.

95. That does not answer my question, with respect.
Did you say in your statutory returns that it would not apply
against a successful legal challenge? Did you say that in the
statutory return?
(Mr Headdon) No, and I do not believe it would be
appropriate to do so.

96. Did you tell the regulator outside the statutory
returns?
(Mr Headdon) Yes, the regulator was fully aware of
the terms.

97. You chose to tell the regulator but you
are now telling us that you did not want to disclose it in the
statutory return which the public may have been able to get, if
they had asked for it. Is that right ?
(Mr Headdon) I am saying that the terms of the reinsurance
were fully disclosed to the regulator.

98. But they are not in the statutory return.
Why did you think it was necessary to tell the regulator about
that particular condition but not the public in the statutory
return?
(Mr Headdon) We did not tell the regulator that particular
condition.

99. You told me you did.
(Mr Headdon) No, we told the regulator about all the
conditions of the reinsurance.